Payment Options for Taxpayers

Watch television long enough and you’ll eventually find someone touting their ability to solve tax debts for “pennies on the dollar.”  Pay very close attention (and get out a magnifying glass) and you’ll also find the fine-print disclaimer stating that such results are unusual and not to be expected.  Although settling a $50,000 tax debt for $2,500 is a tax professional’s rare pleasure, taxpayers do have options when it comes to repaying the tax man.  Today, I will discuss three tools Tax Professionals use to help taxpayers meet and reduce tax debts: the Installment Agreement, the Offer in Compromise, and the Partial Payment Installment Arrangement.

Installment Agreement:  Taxpayers who owe $25,000 or less may qualify for an automatic installment agreement.  An automatic installment agreement gives taxpayers up to five years to pay past due taxes.  The installment agreement is requested by completing Form 9465, Installment Agreement Request.  If the agreement is accepted, a fee between $43 and $105 will be added to the balance due.  Interest and penalties will also continue to be charged during the agreement period.

Installment payments can be made by mail, through bank auto-draft, or through payroll deduction.    If payment is mailed it is very important that each payment be made on time (regardless of whether a billing statement is received from the IRS).  It is also important that all future tax obligations be paid by the due date.  Failure to make timely installment payments or to pay future taxes may void the agreement and send the debt (and the debtor) back into collections.

Taxpayers can enter into an installment agreement themselves.  However, those who owe taxes, penalties and interest of more than $25,000 or have defaulted on a previous installment agreement may benefit from professional’s assistance.

Offer in Compromise:  This is the “tax-saving” option most touted (exaggerated) by television commercials.  An offer in compromise occurs when a taxpayer offers less than the total amount due to settle a tax deficiency.  Although a valuable addition to the Tax Professional’s tool bag, successful offers in compromise are relatively rare.  Based on raw historical data, the average offer in compromise has about a 1 in 5 chance of being accepted by the IRS.  Offers in Compromise also take months, often many months, to craft, submit, and guide through the application process.

Once an offer in compromise is made, the IRS collection process is generally put on hold while the offer is considered.  This provides the taxpayer a brief reprieve from the collection process but there is a down side - interest and penalties continue to mount and the statute of limitations (the IRS generally has ten years to collect unpaid taxes) may also be extended for an amount of time equal to the consideration period.

The criteria IRS for who will qualify for an offer in compromise is very narrow.  One of the tasks of the tax professional is to determine which taxpayers will make successful offer- in-compromise candidates.  Taxpayers with the best chances for success are those for whom: 1) full collection is doubtful, 2) there may be questions as to whether the taxpayers owes the full amount of tax due, or 3) due to extenuating circumstances, paying the tax will place extreme hardship on the taxpayer or their family.

Partial Payment Installment Agreement: The third tool tax professionals use to help taxpayers is called the Partial Payment Installment Agreement (PPIA).  The PPIA contains aspects of both the installment agreement and the offer in compromise.  Like an installment agreement, an agreed-upon payment amount is made each month.  But, these payments are only made until ten-year collection statute expires.  The total of the payments made are less than the total of the tax, penalties and interest due and remains uncollectible as in an offer in compromise.

Today I have discussed several options available to taxpayers who back taxes.  I did not, however, discuss IRS net-worth or cash-flow guidelines or many other factors that may impact your particular situation or payment strategy.  As always, if you have questions or need assistance, please feel free to contact our office to speak with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.